Fed Reading.

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Presentation transcript:

Fed Reading

Tools of Monetary Policy Discount Rate & Open Market Operations

3-Tools of Monetary Policy The Fed has 3-tools to implement monetary policy: reserve requirement (currently 10.0%) discount rate (currently 0.75%) open-market operations (currently 0.00% target) alters the Federal Funds Rate

Changing Money Supply Changing the discount rate & reserve requirement will increase or decrease Money Supply Discount Rate & Reserve Requirement Money Supply Discount Rate & Reserve Requirement Money Supply

Open-Market Operations What: The primary way the Fed changes money supply How: A process which involves the Fed buying & selling U.S. Government bonds Bonds are also known as gov’t securities Result: the “open-market” process alters the Federal Funds Rate a free market short term interest rate where banks lend to other banks Price determined by supply & demand

Open-Market Operations “in action” To increase money supply: the Fed buys government bonds (securities) from public To decrease money supply: the Fed sells government bonds (securities) to public Gov’t bonds Federal Reserve Public Market Money

Federal Funds Market what: a very important short term interest rate Affects loans for: cars, houses, credit cards, business, etc….. 6.0% 1.0% 5.25% Currently 0.0%

Bernanke Interview Part II http://www.youtube.com/watch?v=LxSv2rnBGA8

Discount Rate Discount rate: the interest rate the Fed charges banks for loans The Fed sets this interest rate NOT a “free market” interest rate (price not determined by supply/demand) Special rate only for Banks to borrow Fed discourages use of the “discount window” In the past not a big part of monetary policy (in 2008-09 very important!) The Fed is the “lender of last resort” in emergencies